GEICO Corporation
Address:
One Geico Plaza
Washington, D.C. 20076
U.S.A.
Telephone: (301) 986-3000
Fax: (301) 718-5234
Statistics:
Public Company
Incorporated: 1936 as Government Employees Insurance Company
Employees: 7,805
Sales: $2.08 billion
Stock Exchanges: New York
SICs: 6331 Fire, Marine & Casualty Insurance
Company History:
The GEICO Corporation is a holding company for a number of insurance companies, primarily the Government Employees Insurance Company, which writes auto insurance for good drivers. The company, which is the seventh-largest American auto insurer, got its start during the Depression in Texas. Drawing from the pool of government employees, the company grew rapidly after World War II and gradually expanded its customer base beyond its original franchise. After near failure in the mid-1970s, GEICO returned to financial health in the 1980s and 1990s.
GEICO was founded in 1936 in San Antonio, Texas, by Leo Goodwin. Goodwin was a 50-year-old employee of U.S.A.A., an insurance company that served the needs of officers in the U.S. military. It was here that Goodwin got the idea of setting up his own insurance company, which would select good drivers as customers. With a pool of better-than-average drivers, and no insurance agents or salesmen as middlemen, he calculated that it would be possible to sell a policy that ordinarily cost $36 or $37 for only $30 and still make money. At the time that Goodwin formulated these plans, this discrepancy represented a huge savings, since many people's weekly salary was less than $30.
Goodwin sought out Fort Worth banker Cleaves Rhea, who agreed to invest $75,000 in his company if Goodwin could put up $25,000. After raising the money, Goodwin chartered the Government Employees Insurance Company (abbreviated GEICO) on September 1, 1936, at the height of the Great Depression. He held one quarter of the company's stock, and Rhea took possession of the other three quarters, in keeping with the proportion of his contribution.
In seeking out a pool of good drivers, Goodwin targeted government employees as people who were likely to be responsible and to have a steady income. Since the largest pool of government employees in one place was, logically enough, in Washington, D.C., Goodwin and his wife, Lillian, moved to the city in 1937 and re-chartered their company on November 30, 1937. GEICO set up offices in the Investment Building, at 15th and K Streets in the northwest quadrant of the city.
Once in Washington, Goodwin and his wife worked tirelessly to make their fledgling enterprise a success. They labored 12 hours a day, 365 days a year, establishing principles to select good drivers and sending out direct mail solicitations to government employees and military personnel. GEICO's direct mail operations took the place of a sales force of insurance agents, and helped to keep the company's rates low. On weekends, Goodwin went out to local military bases and personally solicited customers, or hand-wrote responses to customer inquiries and complaints. At the end of the company's first year in business, GEICO had written $104,000 worth of premiums.
Each year, Goodwin's underwriting losses declined, until 1940 when the company showed a $5,000 underwriting gain and a $15,000 profit. In an effort to strengthen these financial gains, Goodwin stressed customer service. In 1941, for instance, a large hailstorm severely damaged thousands of cars in the Washington area. Goodwin arranged with repair shops to work 24 hours a day on the company's customer's cars, and he also had automotive glass specially shipped to Washington to fill the sudden demand. As a result of these efforts, his policyholders had their cars repaired far sooner than many others.
The entry of the United States into World War II at the end of 1941 brought significant strain to GEICO, as its pool of military and federally employed policyholders moved about the country frequently and were shipped overseas. As the American economy was converted to wartime production, rationing, price freezes, and shortages of essential goods resulted. Goodwin relied on family members and a group of young female employees to keep GEICO afloat during the war years.
In the wake of the war, GEICO's business expanded dramatically as millions of soldiers returned home and purchased cars and houses, which GEICO was able to insure. In 1946 the company's net income quadrupled, and premiums reached $2.5 million, 50 percent more than the previous year. To handle this new business, GEICO augmented its staff with a group of young returning veterans who would form the backbone of the company's management in the postwar years.
By 1948, GEICO's value had reached approximately $3 million. At this time, Goodwin's original co-investor, the Rhea family, sold its stake in the company to the Graham-Newman Corporation of New York, E. R. Jones and Company of Baltimore, and David Lloyd Kreeger, a private investor who lived in Washington, D.C. Later that year, Graham-Newman distributed its portion of the company's 175,000 shares to its stockholders, and GEICO became a publicly traded company. In the following year, GEICO bought a building to house its rapidly expanding operations, at 14th and L Streets Northwest, in Washington. The six-story structure cost $725,000 to buy and renovate, offered 48,000 square feet of space, and was ready for occupation within a year.
Also in 1949 GEICO began to branch out, offering services beyond basic property insurance for the first time. The company incorporated the Government Employees Corporation (GECO), a Delaware finance company that made loans for the purchase of cars and boats. After GEICO customers began to ask if they could buy life insurance from the company, GEICO set up the Government Employees Life Insurance Company (GELICO) in Washington with $300,000 in capital raised from GEICO shareholders. In setting up these two spin-off companies, GEICO separated them from the parent company to avoid jeopardizing the financial health of GEICO by taking risks in unfamiliar fields. When each new company was formed, GEICO shareholders were offered the opportunity to buy stock in the new enterprises, so the three companies had many owners in common. Although their shares were traded separately on the stock exchange, they also shared services and office space, as well as key management with GEICO. By the end of 1949 the parent company of these new offspring had passed the $1 million mark in profits for the first time.
In 1950 GEICO expanded its geographical reach, winning a license to sell insurance in the key New York market as well as in nine other states. The company further expanded its potential market of policyholders in 1952 when it made all state, county, and municipal workers eligible for coverage. As a result of this change, over 41,000 new policyholders joined the company in that year. Written premiums jumped by more than 50 percent, to $15.2 million. To handle some of the influx of new customers, GEICO opened an information office in New York City, at 125 Broadway. This facility was so heavily used that an underwriting staff was added later in 1952 and a claims staff was installed the following year.
Also in 1953 GEICO purchased the old Federal Housing Administration Building at Vermont Avenue and K Street Northwest in Washington, D.C. Two years later, it was renamed the GEICO Operations Building. Also in 1955 GEICO expanded the types of insurance coverage it offered when it began writing fire insurance for dwellings and personal belongings in Washington, D.C., Maryland, and Virginia.
In 1956 GEICO took its first step toward automating its operations when it installed an IBM Type 500 Magnetic Drum Data Processing Machine at its operations facility. By the following year, premiums had increased to $36.2 million. In 1958 GEICO expanded its customer pool further when it added civilian professional, technical, and managerial occupation groups to those who were eligible for insurance coverage. With this enlargement, the company's number of policies rose to 485,443. Its customers were spread throughout the nation. The following year, GEICO moved again to a bigger facility; its 1,100 employees were transferred to a newly built Operations Center in Chevy Chase, Maryland, a suburb of Washington.
The company continued its technological innovation the following year when a new telephone system was installed in Chevy Chase that could handle up to 50 incoming calls at once. Also in 1960, GEICO extended the services it offered when it began to market a homeowners insurance package to its policyholders. By the following year, this package was being offered in 36 states and the District of Columbia. In 1961 GEICO also organized the Criterion Insurance Company to provide automobile insurance for enlisted military personnel who did not meet GEICO's good driver standards.
Along with this expansion in the types of coverage it offered, GEICO continued its geographical expansion in 1961 when it opened the company's first West Coast office, in San Francisco. Employees in this office handled sales, policy service, and claims settlement. A year later the company opened a second western office, in Denver. This facility was the headquarters of the Government Employees Finance Company (GEFCO), which was set up to make personal and educational loans. Nine years after its inception, this company was merged with the Government Employees Corporation (GECO), another loan outfit.
In 1964 GEICO pased the one million policyholders mark. In the following year, the company opened its first drive-in auto claim center in Chevy Chase, Maryland, to serve Washington-area policyholders. GEICO and its various subsidiaries continued to expand throughout the 1960s. By 1968, the company had offices in 24 states and three foreign sites: England, West Germany, and Okinawa. GEICO's foreign offices were located near large concentrations of U.S. servicemen.
By 1971, GEICO had become the fifth-largest publicly held auto insurance company in the United States. In the following year, the company passed the two million policy mark: its number of policies written had doubled in just eight years. After this remarkable postwar growth streak, however, GEICO began to lose its way as the structure of the insurance industry started to change.
In 1973 GEICO abolished the last of its occupational restrictions on eligibility for insurance. This step was only taken after a seven-month period of study, during which company executives decided that new computerized data bases, which provided information on an individual's driving record, provided sufficient means for determining who was a good driver. In place of reliable driver record information, the company had previously generalized on the basis of occupation about a driver's probability of mishap, but with access to new data, GEICO felt that it could safely expand its pool of potential clients. With this step, the company made its services available to the entire population. By the end of the year, this move had helped the company to become the fourth-largest publicly held auto insurer, with more than $479 million in annual premium income.
To solicit further growth in the population at large, GEICO ran advertisements, sent out 25 million pieces of direct mail a year, and relied on word of mouth from its current policyholders. In addition, the company had 123 field offices where salaried agents sold insurance policies. A network of regional offices with switchboards and operators was also being built, and the first center, a $13.1 million facility in Woodbury, New York, was dedicated in October, 1973. With a greater emphasis on regional operations, the company hoped to entice more customers west of the Mississippi, where only 20 percent of its policyholders lived.
Despite this push for new customers, GEICO continued to insist that it only insured good drivers. By this time, however, the company's reliance on good drivers to keep its claims down was becoming less and less feasible as no-fault insurance laws swept the nation. Under the old system, the insurer of the driver at fault in an accident paid for everything. Since GEICO drivers were rarely at fault, the company paid out little in fees, which enabled it to keep its premiums down. Under the new system, however, claims were determined by how much damage was done, not by who was at fault. In addition, GEICO found itself squeezed by regulatory restrictions on its rates, as public outrage about rising insurance costs caused states to pass laws limiting the amounts that companies could charge. These new laws, along with GEICO's headlong expansion, brought the company to the brink of disaster in the mid-1970s. The company had overestimated its own financial strength and discovered that it had underestimated its losses by $100 million. In 1975 GEICO reported a loss of $126.5 million, as high claims for hospital and auto repair fees battered its bottom line.
In May of 1976 GEICO appointed a new chairman, and the company undertook an aggressive program to stay afloat. With the assistance of the District of Columbia's Insurance Superintendent and the rest of the insurance industry, a rescue plan was devised for the company. A consortium of 27 insurance firms took over one-quarter of the company's policies, on a commission basis, so that the company would not fail and shake public confidence in the insurance industry. A stock offering of $76 million, to be used to pay off claims, was successfully completed, and GEICO also instituted a stringent cost-containment program, called Operation Bootstrap, in which policyholders in certain states were dropped and other high-risk drivers were eliminated, among other measures.
Although losses for 1976 equaled $26.3 million, by 1977 GEICO was proclaiming that it had returned to financial solvency, and the company began a period of retrenching and reorganizing. In 1978 GEICO began to acquire the stock of its three sister companies in an effort to diversify the company's lines of business. In January, 1979, a holding company for all the GEICO properties was formed and named the GEICO Corporation. By the start of the 1980s, GEICO was a much smaller company than it had been at its height in the 1970s, and it began to move cautiously into new areas. In 1981 the company formed Resolute Group, a reinsurance subsidiary set up to insure insurers. Also in that year, the company formed the GEICO Investment Services Company.
After selling off its 66 percent interest in GELICO, GEICO made a series of acquisitions. In 1982 the company bought a property casualty insurance company, which wrote standard insurance, and named it GEICO General. The company also bought the Garden State Life Insurance Company, and renamed it the GEICO Annuity and Insurance Company. The Criterion Casualty Company was also formed to write policies for young male drivers who could not obtain insurance elsewhere.
In 1984 GEICO increased its level of automation, and this investment was rewarded with lower costs and higher profits. Throughout the 1980s GEICO stuck to its core business of writing insurance policies for good drivers, and the company's financial position steadily improved. By 1991, its profits had reached $193.8 million, and the company had become the country's seventh-largest automobile insurer. In an effort to expand its market, GEICO formed an automobile club to compete with the American Automobile Association (AAA), and also tried to increase its market share in the homeowner's insurance field. In addition, the company continued its policy of buying up its own shares, strengthening its financial position further. As GEICO moved into the mid-1990s, the firm appeared to be well suited for continued financial stability. After its close brush with oblivion in the mid-1970s, the company had returned to its original franchise of low-cost insurance for good drivers, using no middlemen, and demonstrated that it could thrive in this niche.
Principal Subsidiaries: Government Employees Insurance Company; GEICO Indemnity Company; Criterion Casualty Company; GEICO General Insurance Company; Government Employees Financial Corporation; Merastar Insurance Company; Southern Heritage Insurance Company; Criterion Life Insurance Company.
Further Reading:
Bremner, Brian, "GEICO's Acceleration Is No Accident," Business Week, March 30, 1992.
"Geico Builds on New Confidence," New York Times, August 16, 1979.
"GEICO's Financial Position Strong," Journal of Commerce, November 10, 1977.
"Is the Party Over?," Forbes, November 15, 1973.
"Why GEICO Is Acquiring More of Itself," Business Week, September 12, 1983.
Zonana, Victor F., "Geico Says '77 Net May Top $32 Million, A Sharp Turnaround from Recent Losses," Wall Street Journal, March 31, 1977.
Source: International Directory of Company Histories, Vol. 10. St. James Press, 1995.
